As in the US, with a large federal budget deficit consumers can spend out of income rather than debt and the economy do reasonably well.

And should they start spending out of both income and debt it gets that much better.

Bank of England Interest Rates to Reach 8% by 2012, Lilico Says

By Scott Hamilton

Aug. 23 (Bloomberg) — Bank of England policy makers will
raise the benchmark interest rate to about 8 percent in 2012 to
combat surging inflation sparked by “explosive” economic
growth, Policy Exchange Chief Economist Andrew Lilico said.

Annual consumer-price gains may accelerate to more than 6
percent in two years as officials expand bond purchases and keep
the interest rate at a record low of 0.5 percent to fight the
threat of a renewed recession, Lilico said in a telephone
interview from the London-based research group today.

While “a dip down in the economy” will slow interest-rate
increases, that will leave the Bank of England “behind the
curve” when it needs to tackle inflation, Lilico said.

The U.K. economy grew 1.1 percent in the second quarter in
the fastest expansion for four years. Bank of England Governor
Mervyn King said this month that inflation, at 3.1 percent in
July, has been faster than officials forecast and may keep
exceeding the government’s upper 3 percent limit into next year.

“The scope for a very strong recovery is definitely
there,” Lilico said. “Once it’s going they’ll find it very
hard to control because the growth will explosive. They’ll get a
big boom and then they’ll have to tighten hard. Our ideas of
what a normal interest rate is to deal with a boom need to be a
bit more realistic than they are now.”

Bank of England officials this month maintained emergency
stimulus to aid the economy during the biggest budget squeeze
since World War II.

Policy makers “need to do enough in terms of keeping
interest rates low and probably doing additional quantitative
easing to avoid that double dip turning into a double slump,”
Lilico said. “It’s not that policy makers are getting it wrong
— they’re getting it right — I just think the consequences of
them getting it right will in the end be inflation.”

U.K. Consumer Finance, Business Confidence Show Weakness

By Craig Stirling

Aug. 23 (Bloomberg) — A U.K. index of consumer finances
stayed close to the lowest level in almost a year in August and
a quarterly gauge of business confidence weakened, evidence
Britain’s economic recovery may be waning.

The measure of finances, based on a survey of 2,000
households, was at 37.9, little changed from July’s reading of
37.2, Markit Economics Ltd. and YouGov Plc said in an e-mailed
statement today. Readings below 50 indicate deterioration. The
index of business confidence fell 4 points in the third quarter
to 21.5, Grant Thornton and the Institute of Chartered
Accountancy in England and Wales said, citing a survey of 1,000
members.

“A downbeat mood spans the household income spectrum, but
remains most acute amongst the lowest earners,” Tim Moore, an
economist at Markit, said in the statement. “Household finances
continue to suffer from a backdrop of squeezed disposable
income, stubbornly high inflation and ongoing public sector
spending cuts.”

While economists predict gross domestic product data this
week will confirm Britain had its best growth since 2006 in the
second quarter, surveys have signaled the pace of expansion may
have weakened since then. Bank of England policy makers kept
open the option of adding emergency stimulus this month to aid
the economy as public-spending cuts loom.

Grant Thornton and the ICAEW conducted their quarterly
survey by telephone from April 29 to July 22. YouGov collected
responses online for the monthly Markit household survey.